Question

Ziegler Company properly applies the lower of cost and net realizable value rule and determines that its inventory value has declined below cost. Which of the following methods may Ziegler use to adjust its inventory to market value?
A) Recognize the write-down as a separate line item.
B) Recognize the write-down as an addition to cost of goods sold.

Answer 1

Answer:

A) Recognize the write-down as a separate line item.

Explanation:

IAS 2 Accounting for Inventory requires that inventory be recognized at the lower of cost or net realizable value. Inventory is a balance sheet item which is initially recognized at cost.

However, once there is an indication that the cost is lower than the net realizable value, the carrying amount of inventory is written down with the write off recognized as a separate line in the P/l and not as an addition to the cost of goods sold.

Hence the right option is A) Recognize the write-down as a separate line item.